American Airlines Takes On Additional Baggage

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American Airlines Takes On Additional Baggage

Subscribe to Portfolio magazineIf you ran the airline with the nation's worst on-time record and one of the worst lost-luggage rates, would you begin charging your customers for the privilege of checking a bag?

You probably wouldn’t, but it's Gerard Arpey who runs American Airlines, the nation's largest airline. So beginning next month, American and American Eagle, its wholly owned commuter carrier, will charge most passengers $15 to check a piece of luggage.

As that comic says, you can't fix stupid. And this fee is going into the Airline Stupid Hall of Fame. Not only will it infuriate flyers—who are already annoyed with American’s lousy operating efficiency and its recent maintenance snafus—it's likely to further erode American's on-time and baggage-handling rates. And it probably won’t generate any additional cash for American.

It goes without saying that American needs the scratch. Its $328 million first-quarter loss was, uh, fueled by what the company says was a $665 million year-over-year increase in energy costs. As the price of oil skyrockets, Arpey is so desperate that he's cutting American’s route network by more than 10 percent, grounding dozens of aging, fuel-guzzling aircraft, and laying off thousands of workers.

To Arpey, baggage must seem like an easy target for quick cash. Many European airlines charge for checked luggage and, in the increasingly à la carte world of U.S. aviation, baggage is the next logical candidate for unbundling. And American did have a moment of clarity: When Arpey announced the $15 first-bag fee at last week's annual meeting of AMR, American's parent company, he was careful to exempt full-fare customers (its most profitable segment), elite frequent fliers (its most loyal) and international passengers (who get a mulligan due to competitive and logistical factors). Arpey aimed the $15 fee directly at the travelers who pay the lowest fares and contribute the least to American’s bottom line.

But that’s where rational thinking ended. Arpey set the fee to kick in on tickets purchased beginning June 15, the start of the busy summer-travel season. That means travelers will have to adjust with just three weeks' notice. American's frontline staffers have no more of a cushion, since they were only informed of the move a few hours before Arpey publicly unveiled it.

And American seems to have imposed the fee without actually calculating how much revenue it could raise. When asked, Arpey couldn't say how many checked bags will fall into the charge-to-check category and was vague about the revenue target.

Worse, the customers targeted with the fee are the ones most likely to try to duck the $15 addition by using larger carry-ons. That's dangerous because these less-experienced fliers (think families and once-a-year vacationers) think any bag with wheels qualifies as a carry-on. It doesn’t. American's website says the largest acceptable carry-on bag is no larger than 45 linear inches (length plus width plus height) and weighs no more than 40 pounds.

So be prepared for time-consuming arguments at the ticket counters and check-in kiosks. Unless it’s prepared to countenance ticket-counter madness, American will have to deploy additional staff to do the baggage triage. There goes some of that extra revenue Arpey was counting on.

Then there's the stress that more carry-on bags will cause at security checkpoints. Fliers who would have normally checked their lotions-and-potions and other troublesome checkpoint items will now have them in their carry-ons. That'll mean more time spent preparing for the screening process and clearing security.

Once these slowed-down, baggage-laden fliers reach their departure gate, they'll run into dozens of other travelers who've also maxed out their carry-on allowance. With airlines running 80 percent full, that means a free-for-all for available carry-on space. American's overworked flight attendants will have to police the planes, often going row by row to ensure that travelers have loaded bins effectively and used their under-seat space. That's sure to delay flights—American ran an industry-trailing 62 percent on time in March—and delayed flights cost money. There goes more of Arpey's $15-a-bag revenue stream.

But, wait, it gets worse. No matter how efficiently passengers and flight attendants arrange luggage, some passengers probably won’t have room to stow their gear. That means American’s gate agents will be required to gate-check the extras. That’s a time-consuming process. An agent must get a luggage tag, affix it to the bag, then hand it off to a baggage handler on the ramp, who must then stow it in the belly of the aircraft. More time lost.

How much time? No one really knows, but an international airline executive tells me that his flights have run an average of 15 minutes later since the carrier adopted a pay-for-bags system two years ago. "I don’t know how much is due to extra carry-on bags, but it’s a factor. It’s eating into the ancillary revenue we get from the baggage charges."

Now the big fly in Arpey's revenue ointment: The high cost of delayed and lost baggage created by too much carry-on luggage. Delayed flights mean missed connections and missed connections mean more of what the industry euphemistically calls mishandled bags. (American already mishandles 7.32 bags per 1,000 passengers; American Eagle's rate is 13.08 per 1,000.)

My sources tell me it costs an airline about $60 in labor costs and trucking fees to return a late bag to a customer. That means each additional delayed bag American creates will wipe out the revenue of four checked bags. And woe to American if it loses more bags. Airlines are on the hook for as much as $3,000 in liability for lost luggage. Carriers rarely pay fliers that much, of course, but let’s say a lost bag eventually costs American $2,250 in cash payouts and administrative costs. At that rate, each additional bag that American loses will wipe out the revenue from 150 checked bags.

Like I said, you can’t fix stupid. You can only wait for Arpey to realize that charging $15 for a checked bag isn't enough. Then he'll raise to it $25, leading even more customers to try to fly only with carry-on bags, thus starting the cycle all over again.

The fine print: None of American's direct competitors—United, Delta, Northwest, Continental or US Airways—have yet matched the $15 checked-bag fee. But history indicates that they will. On the other hand, Southwest Airlines, the industry's only profitable major carrier, has announced that it will continue to allow travelers to check two bags for free.